Kentucky Nullifies Pre-Employment Arbitration Agreements

Kentucky Nullifies Pre-Employment Arbitration Agreements

Commentary: Pre-Employment Arbitration Update

Continuing a trend spanning back several years, the Kentucky Supreme Court has defied federal precedent concerning the enforcement of arbitration agreements. On September 27, 2018, the Kentucky Supreme Court issued an opinion in Northern Ky Area Dev. Distict v. Snyder.¹ (“NKADD”). The issue in NKADD was relatively straightforward – does the Federal Arbitration Act preempt a Kentucky statute that prohibits employers from conditioning employment on an employee’s agreement to arbitrate any claims arising from the employment. The Kentucky Supreme Court held that the FAA did not, meaning that an arbitration agreement entered into as a condition of employment is void under Kentucky law. ²

According to the Kentucky court, the law “invalidates arbitration contracts when the employer evidences an intent to fire or refuse to hire an employee because of that employee’s unwillingness to sign such contract.” ³ Cutting a very fine distinction, they explained that “This is not an attack on the arbitration agreement [which would be prohibited by the FAA] – it is an attack on the employer for basing employment decisions on whether the employee is willing to sign an arbitration agreement.”⁴

What makes Kentucky’s decision particularly puzzling is that only 18 months ago the Supreme Court reversed Kentucky 7-1 on a very similar issue in Kindred Nursing Centers LP v. Clark.⁵ In Kindred, the Supreme Court reversed a Kentucky decision that had held that a power of attorney granting the attorney-in-fact the power to make “contracts of every nature in relation to both real and personal property” did not grant the attorney-in-fact the power to enter into arbitration agreements. Kentucky held that only a specific delegation the power to enter into arbitration agreements in the power of attorney could grant on the attorney-in-fact the power to waive the “divine God-given right” to a trial by jury. In reversing this decision, Justice Kagan wrote that Kentucky may not invalidate an arbitration agreement based “on legal rules that ‘apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’” This would seem a rather straightforward application of the Supreme Court’s AT&T Mobility LLC v. Concepcion ⁶ decision. Indeed, commentators at the time were describing the Kentucky decision with phrases like “flouting Supreme Court precedent.”⁷

Recognizing the parallels between Kindred and NKADD, Kentucky went to great lengths to distinguish Justice Kagan’s Kindred holding in its NKADD decision. However, the main thrust of the court’s rationale — “This is not an attack on the arbitration agreement – it is an attack on the employer for basing employment decisions on whether the employee is willing to sign an arbitration agreement.” — blatantly states that the statute is an arbitration-specific rule. Put differently, an employer can condition employment on all sorts of things — location, attendance, trial period performance, signing an NDA or a noncompete, training requirements, etc. But arbitration is specifically called out as different from every other potential term of employment. As Concepcion puts it — restrictions that “apply only to arbitration” are invalid.

The Kentucky Supreme Court also put forward the idea that the arbitration agreement was ultra vires: “We conclude that [the employer] do[es] not have the power to compel, as a condition of employment, any employee agree to arbitrate any claim right or benefit he or she may have against NKADD. Although NKADD appears to have broad power to enter into agreements and define the terms of those agreements, KRS 336.700(2) acts [sic] expressly prohibits NKADD from conditioning employment on an agreement to arbitrate.” ⁸ So, what about this idea that the employer doesn’t have the power to enter into the arbitration agreement in the first place? Justice Kagan wrote in Kindred that it was well-settled law that “a rule selectively finding arbitration contracts invalid because improperly formed fares no better under the Act that a rule selectively refusing to enforce those agreements once properly made.”  It’s worth quoting in full Justice Kagan’s law school-style reductio argument:

Adopting the respondents’ view would make it trivially easy for States to undermine the Act – indeed, to wholly defeat it. As the respondents acknowledged, the reasoning would allow States to pronounce any attorney-in-fact incapable of signing an arbitration agreement – even if a power of attorney specifically authorized her to do so.… And why stop there? If respondents were right, States could just as easily declare everyone incompetent to sign arbitration agreements. (That rule too addresses only formation.)

It’s really hard to see how a state’s prohibiting an employer (even a public employer, like NKADD) from conditioning employment on agreeing to arbitrate survives that reasoning. How is barring employers from “conditioning” employment on an agreement to arbitrate different from barring software companies from “conditioning” their licenses on the licensee’s agreement to arbitrate? Or barring cell phone companies from “conditioning” access to the network on an agreement to arbitrate. Or prohibiting anyone from conditioning any agreement on an agreement to arbitrate. It is a distinction, but it’s most likely a “too cute” distinction for the Supreme Court’s expansive view of FAA preemption.

Kentucky is certainly an outlier here. The Cincinnati Enquirer on October 5, 2018, quoted an Ohio law professor on this decision: Kentucky’s decision nullifying pre-employment arbitration agreements “makes Kentucky unlike 49 other states right now.”⁹ Of course, across the nation employers have been increasingly requiring potential employees to agree to arbitrate potential employment claims and to waive class arbitration; and that adoption has likely accelerated after the Supreme Court’s May 2018 decision in Epic Sys. Corp. v. Lewis.¹⁰ The dismissal of several thousand plaintiffs from a federal wage-and-hour litigation against Chipotle has already demonstrated for employers the cost-benefit thesis of combining arbitration agreements with class waivers; it also provides a policy example of why the Kentucky Court may not like the Supreme Court’s current arbitration jurisprudence.

NKADD is a case for employers to monitor, especially those with operations in Kentucky, since it has effectively nullified any employee arbitration agreements within that state for now. ¹¹ There may be workarounds as well that employers can implement in their on-boarding procedures to limit the risks from this decision.